Dividend Stocks For Dummies
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Most of the companies that pay out dividends are what you’d probably call “mature.” They’re settled in. They may have slowed down a bit in terms of growth, but they’re rock-steady and highly dependable.

Companies proceed through various stages of life, just like people:

  • Infancy: Startup companies typically have great prospects but require more money and attention to get up and running. During a company’s infancy, it’s probably spending more money than it’s earning, but its low share price and potential for big profits are attractive to growth investors. Without an influx of sufficient cash to fuel their growth, companies at this stage risk becoming like malnourished children, and their growth can be stunted.

  • Childhood: Assuming a company survives its infancy, it typically develops quickly. At the childhood stage, revenues often grow in leaps and bounds, too, but the risk factor for investing in the company remains high. After all, children are prone to having accidents and making mistakes.

  • Teenage: During this stage (but not necessarily company age), companies can be as different as any two teenagers. Some are fairly mature. They earn enough to cover their expenses and perhaps even a little surplus. They make good choices. They’re fairly independent. Other companies are accidents waiting to happen — irresponsible, misdirected, accident-prone, ready to take risks without carefully evaluating the situation, and constantly needing more and more capital just to stay afloat. Companies at this stage generally still have plenty of growth potential, but poorly managed companies have more potential for failure.

  • Adulthood: Mature companies are like adults. They’ve done most of their growing already. Mature companies still raise profits, but typically at a slower rate. Although they may not see big year-over-year advances in share price and profits, their long experience has taught them effective, efficient ways to earn money consistently. You can always find exceptions, but a mature company is one that generally takes fewer outrageous risks to score big.

Strive to become a mature investor, too. The novice is often eager to scoop up shares of growth companies in their infancy or early childhood in the hopes the share price doubles or triples in a short period of time. In their irrational exuberance, these novice investors may fail to account for the risk factor — the more you stand to gain, the more you stand to lose (generally speaking). This doesn't mean that investing in companies in their infancy is necessarily bad, but it’s typically riskier than investing in an established company with a proven track record.

About This Article

This article is from the book:

About the book author:

Lawrence Carrel is a financial journalist and served as a staff writer at TheWallStreetJournal.com, SmartMoney.com, and TheStreet.com. He is the author of ETFs for the Long Run: What They Are, How They Work, and Simple Strategies for Successful Long-Term Investing (Wiley).

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